Despite negative foreign fund inflows in most emerging markets, India continues to attract significant investments, driven by robust ETF inflows and positive investor sentiment, according to a report by Kotak Institutional Equities (KIE), which tracks foreign fund inflows into India and emerging markets.
ETF flows refer to the flow of money in and out of exchange-traded funds (ETFs). ETFs are investment bundles that trade on a stock exchange like individual stocks. Imagine a basket filled with different securities, such as stocks, bonds, and even commodities. That basket itself becomes an ETF and can buy and sell throughout the day depending on market price fluctuations.
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ETF flows are a way to gauge investor sentiment towards a particular sector, asset class, or the market as a whole.
India-focused funds saw inflows of $1.5 billion in April 2024. In contrast, GEM funds saw outflows of $697 million, suggesting investors are pulling money out of funds that invest in a broad range of emerging markets, including India and other countries.
India stands out
The report highlights a clear contrast between India and other emerging markets: While China, Brazil and South Korea saw large outflows totalling over $2.6 billion, India saw net inflows of $419 million in April 2024. This positive trend was mainly driven by exchange-traded funds (ETFs), which saw net inflows of $428 million, offset by outflows from non-ETF investments of just $8 million.
India-focused funds see strong growth:
India-specific funds, which focus solely on Indian equities, also saw significant inflows. These funds attracted a combined $1.5 billion in April, of which $679 million came from ETFs and $837 million from non-ETF investments. This indicates strong investor confidence in the Indian economy and its long-term growth prospects.
Global emerging market funds are seeing a mixed picture.
While India stands out as a bright spot, the report shows that the picture is more mixed for Global Emerging Markets Funds (GEM funds). These funds, which invest in a broad range of emerging economies, recorded net outflows of US$697 million in April. But a closer look shows that India is also favored in this category. Allocations to India by GEM funds increased to 18.8% in April from 18.3% in March.
Let’s take a closer look at the numbers:
The KIE report goes deeper by analysing the investment style of these fund flows. Passive investing through ETFs continues to dominate in India. Exchange-listed funds saw inflows of $428 million, mainly through ETFs. However, India-specific funds also saw inflows of $837 million through non-ETF investments. This indicates that both passive and active investors are finding opportunities in the Indian market.
A significant portion of the average Asia (ex-Japan) fund – 42% – is invested in China and India, indicating that investors view these countries as important markets in the region.
Changes in Allocations in India: There have been some recent changes in the amount of funding being directed to India.
The Asia (ex-Japan) fund (a fund focused on Asia excluding Japan) slightly reduced its allocation to India, from 19.4% in March to 19.2% in April.
Meanwhile, the Global Emerging Markets (GEM) fund, which invests in developing economies across the globe, increased its allocation to India to 18.8 per cent in April from 18.3 per cent in March.
Similar trends among non-ETFs: The trend seen across funds is also reflected in non-exchange traded funds (non-ETFs), investment funds that are not traded on a stock exchange. Allocations to India among non-ETFs in Asia ex-Japan fell marginally to 19.6% from 19.8%.
Conversely, GEM Non-ETF increased its allocation to India from 16.6% to 16.8%.
So while some Asia (ex-Japan) funds have seen a slight decline in investments into India, this has been offset by increases from emerging market funds, suggesting that investors may be shifting their focus within Asian markets.
What did foreign investors sell in April 2024?
FPI net inflows by sector, April 2024 (USD million)
Note:
(a) BSE has categorised around 4,800 issuers into 22 sectors. FPI investments outside these 4,800 issuers are categorised as ‘Others’. Source: NSDL, Kotak Institutional Equities
